Beat the Street With 25 Cents

For months now, I've been using Motley Fool CAPS to evaluate the Wall Street wizards who rate stocks and gauge the likelihood that those ratings will pan out. In columns like "Get to Know a Guru," we met the unsung heroes (and villains) of Wall Street. In "This Just In," we put the experts to the test, determining whether their upgrades and downgrades are worth the virtual paper they're printed on.

Today, I want to step back and see the big picture. Using the full breadth of CAPS to take a snapshot of the Wall Street Wise, I'll lay out for you who's hot, who's not, and overall, whether these analytical hotshots are smarter than a fifth-grader.

News flash: They're notWe often hear this statistic: "80% of mutual funds underperform the market." But until now, it's been hard to fact-check that bit of commonly accepted Foolishness. Fortunately, CAPS does something nearly as good. It records every stock pick made by 179 professional stock pickers, from professional talking heads like Jim Cramer to financial bastions such as JPMorgan Chase. It tracks the recommendations' performance, and most importantly, it records whether the picks are beating or lagging the S&P 500's return. So how are the experts doing?

Not so hot, as it turns out. Of the 176 professional players tracked on CAPS, fewer than half (71) can claim better than 50% accuracy on their picks.

Data as of April 14. *Which is to say, how badly is this active pick underperforming the S&P 500?

Now, mind you, these analysts aren't always wrong. On (rare) occasion, even the least prescient banker will luck upon a winner. Case in point: Dougherty came very close to "calling the bottom" on beleaguered armored vehicles maker Force Protection (Nasdaq: FRPT) when it recommended bottom-fishing around three bucks and change back in November.

That prescient pick has already doubled for Dougherty -- but fails to counterbalance the analyst's many more wrongheaded bets. On average, even this "best" of the six firms named above guesses wrong about twice as often as right. And while batting .340 is pretty good in baseball, it just doesn't cut it when you've got investors tendering you their hard-earned money in exchange for good advice.

So pardon my bluntness, but I think you're better off flipping a quarter than paying these analysts for investing advice.

Lies, damned lies, and statisticsConfession time: The numbers above certainly suggest that the old truism about mutual funds, and the professionals who run and market them, holds true. But in a new service like CAPS (still in beta, by the way), there are bound to be bugs in the system.

Some such "bugs" are intentional, such as our decision to not permit ratings on "half-penny" stocks with market caps of less than $100 million, or stock prices under $1.50 per share. Some are not -- glitches in the system which may unintentionally affect the statistics CAPS generates. So before the analysts named above cry bloody murder, let me extend the following olive branch: We're listening.

If you've got a gripe about your rating, and the facts to back it up, we'll work with you to fix the problem. Drop our CAPS feedback board a note, and we'll give your arguments a fair hearing. On the other hand, if you're just mad because we're highlighting statistics that you'd rather not advertise, there's not a lot we can do for you.

(Well, actually, there is one thing. Just like anyone else, you're welcome to check out Motley Fool Stock Advisor, where fully 60% of our active picks are beating the market. Not every stock we recommend turns out to be a winner, but overall, our portfolio is currently beating the market by more than 36 points per pick. This offer gets you Fool access free for 30 days.)

Fool contributor Rich Smith owns shares of Force Protection. You can find him on CAPS, publicly pontificating under the handle TMFDitty, where he's currently ranked No. 323 out of more than 130,000 members.

Comments from our Foolish Readers

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It is my contention that if these people knew what they were talking about they would not have to depend on selling subscriptions to make money in the equities markets. I'll continue to do my own research and making my own decisions.

The problem with analysts is their time horizon. All their price targets and recommendations look 1 year into the future. It is nearly impossible to reliably and consistently predict what happens to stock price over such short time frame. Even well-preforming companies' stock will often not deliver the type of return you are hoping for in the course of 1 year. As a result of starting out with a wrong premise, that entire industry is an exercise in futility when it comes to stock picking.